Section 125 - HRA - HSA - ICHRA plans

With rising health insurance premiums, employers are looking at strategies to balance health plan benefits with rising premiums. Often reducing rising premiums involves increasing out of pocket expenses. By selecting a health plan with higher deductibles, employers may find needed premium savings. These savings may be then used to offset increased employee out of pocket expenses or to maintain adaquate coverage. Since our inception, Small Business Insurance Agency has offered alternative strategies to guide our clients through an ever changing health insurance market. 

If you'd like more information on Section 125 - HRA - HSA - ICHRA plans for your firm, please feel free to contact me to discuss your options and schedule an appointment.

      Health Reimbursement Arrangements (HRA) IRC sec. 105/106 -

  • Accounts are funded solely by the employer on behalf of employees and their qualified dependents.
  • The pre-tax beneifts apply only to non-shareholders of S-corporations or non-members of limited liability corporations.
  • Each medical care expense must be substantiated.
  • Payments made on behalf of employees are excludable from the employee’s gross income because they may only be used to reimburse for qualified (IRC sec. 213(d)) medical expenses. 
  • Additionally, nondiscriminatory employer payments can only made on behalf of employees who participate in the employer’s group health plan.
  • HRA’s are not required to make the planned maximum annual contribution all at once.
  • HRA’s do not permit any salary deferral elements.
  • HRA’s are limited to provide benefits for group coverage. 
  • Sponsors may offer limited benefit HRA's for certain select benefit plans.
  • There are no legislative requirements pertaining to HRA plan design (no 5500 filing)
  • Unused funds may carry over year-to-year to increase the maximum reimbursement amount in subsequent coverage periods.
  • Employer’s contributions to HRA's are considered part of a group health plan and subject to COBRA.
     

    Health Savings Accounts – H.S.A. (IRC Section 223(d)(1) 

  • H.S.A is a trust established (by individual or employer for eligible employees) to pay for qualified medical expenses of the individual and their eligible dependents.

  • Eligible individuals include shareholders of S-corporations and members of a L.L.C..
  • H.S.A are available to all size groups.
  • Only people covered by a Qualified High Deductible Health Plan (HDHP) can participate in a H.S.A.
  • A qualified High Deductible Health Plan (HDHP) is a health plan that that meets the IRS statutory definition for a HDHP's guidelines for deductibles for single and family coverage as well as the maximum out of pocket expenses. 
  • The limitation for a single and family deductibles as well as out of pocket expenses is indexed annually. 
  • When a HDHP offers in and out of network benefits, the qualified out of pocket limitations are based on in network expenses to determine if the HDHP meets the statutory requirements.
  • H.S.A. contributions may come from employers, eligible individuals or both.
  • H.S.A.'s may be offered under an employers cafeteria plan allowing employees to contribute with pre-tax salary reductions.
  • The balance in the H.S.A account is non-forfeitable and remaining H.S.A. balances may be carried over year-to-year.
  • Contributions made to an employee’s account by the employer are excluded from the employee’s income.
  • Any income earned within the H.S.A. is exempt from income tax.
  • The employer’s contributions to the H.S.A. are not considered part of a group health plan subject to COBRA.
  • Employers offering H.S.A.’s must make comparable contributions (the same dollar amount or the same percentage of the annual deductible limit under the HDHP).
  • The family is defined as the employee and one or more dependents. Usually, the full family deductible must be one person (or a combination of insured family members) before any benefits will be paid under family coverage. 
  • Eligible individuals who participate in a H.S.A. (account beneficiaries) cannot be covered under any other non – HDHP that provides coverage for any benefit covered under the HDHP therefore:
    • Individuals who are eligible for Medicare may not make contributions to a H.S.A.
    • The sole health plan restriction does not apply to coverage for plans such as workers compensation, property insurance, specified illness (ex. cancer insurance), hospital indemnity, accident, disability, dental, vision care or long term care policies.
  • H.S.A. contributions are used to determine the participants adjusted gross income before any itemized or standard deductions.
  • H.S.A. contributions may not exceed the statutory limitations.
  • Contributions above the limit are not deductible or excludable from income.
  • Excess contributions are subject to a 6% excise tax unless returned to the account beneficiary before his tax filing deadline.
  • Distributions from a H.S.A. for qualified medical care expenses are TAX FREE.
  • Distributions for non-qualified medical care expenses are taxable and subject to an additional 20% excise tax. The excise tax does not apply for H.S.A. distributions made after death, disability, attaining age 65 (Medicare eligibility date) and for qualified rollovers including transfers due to divorce. Rollovers are permitted once within a rolling 12-month period.
     
     
  • \Flexible Spending Accounts – (FSA) 
  • Allows employers to establish a plans for employees to make pre-tax deductions for specific (IRS sec.213(d)) medical costs that are either not fully covered or excluded by the employee’s health insurance plan. 
  • Accounts are funded through salary reduction agreements 
  • Employee contributions are made on a "use-it-or-lose it" basis and any balance remaining in the FSA at the end of the year would revert to the employer/sponsor.
  • FSA sponsors may elect to allow up to $500 of unused balances to roll over into the following year.
  • Contribution elections for active employees are made at the beginning of the plan year and may only be modified if there has been a qualified change in family status or for employees that have terminated service.
  • Medical FSA’s have no mandated plans designs but have an annual indexed maximum limit. 
  • The plans are set up to be funded evenly over the plan year’s pay periods.
  1. Employers need to be aware that the employee's full planned contribution must be available to the employee as of the plan’s start date. 
  2. Therefore, employers may want to establish plans with pre-determined plan maximums to limit their exposure.
  3. A potential liability is when the employer has to pay an employee’s full plan year account election only to have the employee terminate employment prior to making their full plan year contribution.
  4. There is no recourse for the employer if FSA funds are advanced prior to the employee making their full account election and terminating employment,
  5. There is no recourse to the employee for any remaining FSA funds that revert to the employer at the end of the plan year.
  • All claims (regardless of the amount of the expense) made to an FSA must be properly documented.
  • FSA’s may also be used to pay for dependent care expenses by establishing a separate component for these expenses.
  1. Unlike the medical FSA, dependent care FSA benefits are only distributed, as employee contributions are available so there is no liability to the employer.

More information on qualifying medical and dental expenses are explained in IRS Publication 502.

 

      Cafeteria or Section 125 Plan 

  • Cafeteria plans allow employees to pay for medical and dental expenses with pre-tax dollars vs. using an after-tax approach.

  • When employees pay for benefits with pre-tax dollars, the wages used to pay for benefits are not subject to federal income tax, FICA tax and in most cases, state income tax. This allows both employees and employers to save significantly on taxes.

The most common provisions in Cafeteria Plans are:

  • Premium Only Plan (POP): Employees pay for their share of group health and dental premiums with pre-tax dollars not subject to federal income, FICA taxes or state income taxes in most states.
  • Dependent Care Reimbursement Plan: Employees pre-tax payments for eligible dependent care expenses are not subject to federal income, FICA taxes or state income taxes
  • Medical Care Reimbursement Plan: Employee make pre-tax payments for health care expenses not covered under the employer's medical and dental plans and the deferred amount is not subject to federal income, FICA taxes or state income taxes in most states.
     

     

Individual Coverage Health Reimbursement Accounts – ICHRA

Individual Coverage Health Reimbursement Accounts (ICHRA) provide a tax advantaged option for employers seeking to provide help paying health plan expenses for individuals that otherwise do not qualify to participate in the employer’s group health insurance plan. ICHRA’s can also be used by employers that do not offer a group health plan.

Reimbursements to employees are tax deductible for the employer and NOT taxable as income to the individuals. ICHRA’s also maybe be paired with Sec 125 plans to allow employees to pay their share of premiums on a pre-tax basis. Health policy benefits paid remain non-taxable if received. 

ICHRA’s allow employers to reimburse employees for premiums and/or out of pocket expenses for employees and dependents for individual health insurance policies (non-group) and Medicare Part A, B, C and D plans.

ICHRA’s may not reimburse for certain limited benefits plans notably vision or dental insurance.

While ICHRA’s provide benefits for a wide range of an employer’s personnel; it may not be offered to self-employed individuals and their spouses. If individuals with plans obtained through an ACA Marketplace exchange participate in an ICHRA it would negate their premium tax credit.

Examples of employees the employers may offer ICHRA’s to include:

  • Full Time Employees not the employer’s traditional health plan
  • Part Time employees
  • Employees working in the same to geographic region
  • Seasonal employees
  • Non-resident aliens with no US based income
  • Employees ineligible to enroll on the employer’s traditional health plan due to geographic region
  • Temporary employees of staffing firms
  • Salaried employees
  • Non-salaried (hourly) employees

 

FAQ’s on ICHRA